Cost Management

Inventory Cost Management

Businesses that sell products to customers have to deal with inventory, which is either produced by the company itself or bought from a separate manufacturer. Inventory costing is when companies assign costs to products. These costs also include incidental fees such as storage, administration and market fluctuation. Generally accepted accounting principles (GAAP) use standardized accounting rules to ensure companies do not understate or overstate these costs.

COGS

Items previously in inventory that are sold off are recorded on a companys income statement as cost of goods sold (COGS). The COGS is an important figure for businesses, investors, and analysts as it is subtracted from sales revenue to determine gross margin on the income statement. To calculate the total cost of goods sold to consumers during a period, different companies use one of three inventory cost methods - first in first out (FIFO), weighted average cost method or standard costing. Costing method last in first out (LIFO)is not supported by Foundry Bean as it is not compliant with GAAP.

First In, First Out (FIFO) (layer costing)

First In, First Out (FIFO) is an accounting method in which assets purchased or acquired first are disposed of first. FIFO assumes that the remaining inventory consists of items purchased last. FIFO is the most widely used method and also the most accurate method of aligning the expected cost flow with the actual flow of goods which offers businesses a truer picture of inventory costs. Furthermore, it reduces the impact of inflation, assuming that the cost of purchasing newer inventory will be higher than the purchasing cost of older inventory. Finally, it reduces the obsolescence of inventory.

Weighted average costing

The weighted average cost method assigns a cost to inventory items based on the total cost of goods purchased or produced in a period divided by the total number of items purchased or produced. Foundry Bean Costing automatically create average cost of the item when it is received in inventory and recalculate average cost when the item is issued or new inventory is received.

Standard Costing

Standard costing is when companies assign the expected (or standard) costs of material, labor and overhead to inventory, rather than the actual costs. This management tool helps to plan budgets, manage and control costs and determine how successfully a company controls cost. A variance is the difference between the standard (target) cost and the actual cost. When negative variances occur, management must take action by identifying the root cause, improving its operations and potentially making changes to the standard cost.